Gold trading during risk-on, risk-off

After jumping 2.17% on Monday, the biggest percentage increase since mid-December last year, the U.S. Comex gold (COMEX:GCJ14) futures declined 0.92% to $1,337.90 on Tuesday as any immediate threat for Russia to invade Ukraine has dissipated while the U.S. prepares to give a loan guarantee of one billion dollars to Ukraine. The S&P 500 Index (CME:SPM14) rallied 1.53% on Tuesday after declining 0.74% on Monday. After suffering from the biggest one-day drop of 3.02% since June last year, the Euro Stoxx Index rebounded 2.7% on Tuesday. The geopolitical crisis in Ukraine has also fuelled a rally in commodities – the CRB Commodities Index has climbed in seven consecutive weeks and has jumped about 1.3% this week. The Dollar Index (NYBOT:DXH14) has risen 0.6% in the past two days.

Good News from the U.S. and China

While the world has been focusing on the tension between Ukraine and Russia and the economic losses incurred not only by Ukraine but also the Russian economy and banks, the U.S. ISM manufacturing index rebounded more than expected from 51.3 in January to 53.2 last month. The Eurozone February flash manufacturing PMI expanded to 53.2 from 53 in January. While China’s HSBC February manufacturing PMI dropped to a seven-month low in February to 48.5, the Chinese government has just set a growth target of 7.5% for 2014, signalling the government wants to maintain growth stability and economic confidence while implementing structural reforms. A moderately slowing China will continue to support gold demand.

Momentum for Gold and Investor Positioning

According to Bloomberg, gold traders are now the most bullish in the past 14 months. The gold-backed ETP holdings rose 6.8 metric tons in February, the first monthly increase since December 2012. The managed gold net combined positions jumped 25% during the week of Feb. 25. This was led by a 38% decline in the combined short contracts. Since the recent peak in December 2013, the net short contracts have declined over 60%, reflecting the rising momentum of gold trading. Events this week, which include the ECB meeting and the U.S. employment report, will further make an impact on the market’s risk appetite as well as the direction of the U.S. dollar and the gold prices.